nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒08‒07
five papers chosen by
Guillem Roig
University of Melbourne

  1. Contracting and the Division of the Gains from Trade By Swati Dhingra; Andrew Bernard
  2. Optimal Organization of Financial Intermediaries By Spiros Bougheas; Tianxi Wang
  3. Contract Farming and Food Security By Bellemare, Marc F.; Novak, Lindsey
  4. Do Search Frictions Compound Problems of Relational Contracting? By Rosch, Stephanie D; Zhang, Cathy; Preckel, Paul; Ortega, David L.
  5. Collateral-Based Asset Pricing By Roberto Steri

  1. By: Swati Dhingra (London School of Economics); Andrew Bernard (Dartmouth College)
    Abstract: Abstract This paper examines the microstructure of import markets and the division of the gains from trade among consumers, importers and exporters. When exporters and importers transact through anonymous markets, double marginalization and business stealing among competing importers lead to lower profits. Trading parties can overcome these inefficiencies by investing in richer contractual arrangements such as bilateral contracts that eliminate double marginalization through fixed fees and joint contracts that internalize business stealing by maximizing joint profits of the exporter and its competing importers. Introducing these contractual choices into a trade model with heterogeneous exporters and importers, we show that trade liberalization increases the incentive to engage in joint contracts, thus raising the profits of exporters and importers at the expense of consumer welfare. We examine the implications of the model for prices, quantities and exporter-importer matches in Colombian import markets before and after the US-Colombia free trade agreement. US exporters that started to enjoy duty-free access were more likely to increase their average import price, decrease their quantity exported and reduce the number of import partners.
    Date: 2015
  2. By: Spiros Bougheas; Tianxi Wang
    Abstract: This paper provides a unified framework for endogenizing two distinct organizational structures of financial intermediation. In one structure, called Bank, the intermediary is financed by issuing debt contracts to investors, and thus resembles commercial banks. In the other structure, called Fund, the intermediary is financed by issuing equity contracts to investors, thus resembling private-equity funds. The paper finds that in the former incentives can be provided in a less costly way, but the latter is more robust to negative shocks on the asset side. Our model predicts that relative to banks, private equity funds are more involved in the running of the firms that they finance, contribute more to the success of these firms, and provide funds to higher-risk, higher-return firms.
    Keywords: Financial Intermediation; Bank; Equity Funds
    Date: 2015
  3. By: Bellemare, Marc F.; Novak, Lindsey
    Abstract: Contract farming has often been associated with an increase in the income of participating households. It is unclear, however, whether contract farming increases other aspects of household welfare. Using data from six regions of Madagascar and a selection-on-observables design in which we control for a household's marginal utility of participating in contract farming, which we elicited via a contingent valuation experiment, we show that participating in contract farming reduces the duration of a household's hungry season by about ten days on average, and that it makes participating households about 20 percent more likely to see their hungry season end at any point in time. Further, we find that these effects are more pronounced for households with a larger number of children, and for households with a larger number of girls. This is an important result as children---especially girls---often bear the burden of food insecurity.
    Keywords: Contract Farming, Outgrower Schemes, Grower-Processor Contracts, Agricultural Value Chains, Food Security
    JEL: L24 O13 O14 Q12
    Date: 2015–07–28
  4. By: Rosch, Stephanie D; Zhang, Cathy; Preckel, Paul; Ortega, David L.
    Abstract: We estimate the effect of search frictions on Kenyan farmers' decisions to supply French beans for export under contract. To do so, we create a model of competitive wage search in posted offer markets with imperfect contract enforcement using the frameworks of Moen (1997) and Mortensen and Wright (2002). Then we employ two novel empirical methodologies to test our model using data from Kenya's French bean export industry. The first methodology measures search frictions based on the spatial density of firms and farmers in the market. The second uses preferences measured in a choice experiment to quantify the impact of search frictions on farmers’ entry and exit decisions under different contract enforcement scenarios. We find that search frictions are present in the market which primarily limit farmers' abilities to match with potential buyers and not vice versa. We also find that increasing buyer concentration has a negative impact on the maximum bid received by farmers, suggesting that buyers tend to target areas where farmers have fewer profitable alternatives to French bean production. Lastly, we find that search frictions can provide a potential causal explanation for why farmers do not enter the fresh market, and also why they do not transition from supplying the less lucrative processed market to the more lucrative fresh market. These findings are important for designing more effective programs to connect small-scale producers to French bean markets.
    Keywords: search theory, empirical contract theory, development, contract enforcement, Industrial Organization, Institutional and Behavioral Economics, International Development, Labor and Human Capital, J64, L14, D86, O13,
    Date: 2015
  5. By: Roberto Steri (University of Lausanne)
    Abstract: Recent corporate finance studies show that hedging is a first-order driver of corporate decisions. I use firms' hedging behavior to build a novel asset pricing model, the Corporate CAPM. I propose a dynamic contracting framework in which collateral constraints induce a tradeoff between hedging and immediate needs for funding. Firms hedge by transferring resources to future states that are most important for firm's value. In the model, firms' hedging behavior is informative of the shareholders' stochastic discount factor, which measures the value of each state. As a consequence, discount rates can be inferred from firm's observed investment, financing, and hedging policies. On the corporate finance side, a calibrated version of the model is broadly consistent with observed corporate policies of US listed firms. On the asset pricing side, the Corporate CAPM is successful in pricing different test assets, also in comparison to leading asset pricing models.
    Date: 2015

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